The Recent Struggles of India’s Stock Market

Optimistic investors had hoped that Narendra Modi, who became India’s Prime Minister with his party’s election victory in May 2014, would jump-start India’s stock market. From early 2014, when Modi’s Bharatiya Janata Party became the overwhelming favorite to win the election, India’s stock market gained almost 40% during the subsequent year. Over the past 12 months, however, Indian stocks have drifted back down, losing almost 15% of their value. Does Modi still have a shot at reviving India’s stock market?

Despite these setbacks, Modi has had some success in improving India’s economy. According to the Financial Times, India overtook China in 2015 to become the top destination for foreign direct investment. And according to the International Monetary Fund, India’s economy grew by a robust 7.3% last year, its fastest growth rate since 2010. The stronger economy is part of the reason why Indian stocks, though down over the past year, have substantially outperformed emerging markets as a whole.

Yet the issue that may have the biggest effect on India’s stock market may not be related to Modi or even India’s economy. In recent years, emerging markets have been battered as the US Federal Reserve has begun reversing course after seven years of keeping interest rates at near-zero levels to try to boost the American economy. The possibility of higher US interest rates has caused investors to pull money out of emerging markets. After the Fed’s initial move to raise rates last December, futures prices suggest that traders are currently expecting the Fed to additionally raise rates once or twice this year. If a strengthening US economy causes the Fed to act more aggressively than that, the effects of those moves on India’s stock market could swamp any success that Modi has with his economic reforms.